MSP violates WTO Agreement on Agriculture – UPSC GS3

How a legal guarantee for MSP will violate WTO rules?
  • Price support provided through MSP will be classified as a trade-distorting subsidy because India’s applied administered price for rice is much more than the 1986-88 External Reference Price(ERP). This overshoots India’s de minimis limit.
  • For instance, according to the Centre for WTO Studies, India’s fixed ERP for rice, in 1986-88, was $262.51/tonne and the MSP was less than this.
  • However, India’s applied administered price for rice in 2015-16 stood at $323.06/tonne, much more than the 1986-88 ERP.
  • Further, procuring all the 23 crops at MSP, as against the current practice of procuring largely rice and wheat, will result in India breaching the de minimis limit.
  • Even if the Government does not procure directly and mandates private parties to acquire at a price determined by the Government, as it happens in the case of sugarcane, the de minimis limit of 10% applies.
  • For example, Very recently, a WTO panel, concluded that India breached the de minimis limit in the case of sugarcane. Because India is offering guaranteed prices paid by sugar mills to sugarcane farmers.
  • Peace clause cannot be used to support India’s case if the MSP system is legalised for 23 crops because the peace clause is subject to several conditions.
  • The peace clause is applicable only for programs that were existing as of the date of the decision and are consistent with other requirements.
  • Peace clause can be availed by developing countries for the support provided to traditional staple food crops to pursue public stockholding programs for food security.
  • Hence, India will not be able to employ the peace clause because crops such as cotton, groundnut, sunflower seed are not part of the food security program.
  • Therefore, India needs to recalibrate its agricultural support programs to make use of the flexibility available in the AoA.
Way Forward:
  • India can move away from price-based support in the form of MSP to income-based support, which will not be trade-distorting under the AoA. But the income support should not be linked to production.
  • India can supplement price-based support with an income-based support policy without breaching the de minimis limit.
  • Government needs to engage with the farmers and convince them of other effective policy interventions, beyond MSP, that are fiscally prudent and WTO compatible.
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